Mountain View, CA – Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL), the parent company of Google and other subsidiaries, is poised for strong growth over the next 3-5 years driven by two key pillars – its investments in large language models and generative AI along with its rapidly expanding cloud computing division, according to experts.
The technology giant, which boasted over $257 billion in revenue in 2021, has been actively developing sophisticated AI models like LaMDA and PaLM under its Google AI division. These models are expected to power next-generation AI services that can understand complex language, generate human-like writing and engage in natural conversations.
“Gen-AI is becoming increasingly intricate due to the substantial growth in use cases and the rapid availability of foundational models to address them,” said Marc Green, an AI analyst at Tech Insights.
“However, deploying Gen-AI through cloud services is the most effective and efficient approach. Google’s framework aligns closely with this demand by offering a diverse portfolio of pre-trained models and solutions that cater to various use cases and domains.”
In addition to AI, Google Cloud Platform (GCP) has emerged as a leading competitor in the cloud infrastructure and platform services sector. GCP offers a comprehensive set of cloud computing services including computing, storage, networking, big data, machine learning and more.
“Google’s approach is similar to that of AWS. However, what sets Google Cloud Platform apart is its product-oriented approach, providing a suite of solutions, including industry-specific offerings, which simplifies the experience for customers,” explained Green.
Google’s Generous Cash Reserves
Backed by its strong free cash flows from search advertising and cloud services, Alphabet boasts one of the healthiest balance sheets among global technology firms.
“Alphabet stands out among its largest peers for its financial prudence, characterized by minimal debt and a substantial cash reserve second only to Apple,” said James Wilson, a senior credit analyst at Standard & Poor’s. “With a net cash position of $106 billion, Alphabet leads the technology sector in financial strength.”
The company’s robust free cash flow, expected to top $150 billion over the next two years, will likely reinforce its already impressive cash reserves and financial flexibility. Notably, Alphabet recently approved an additional $70 billion in share repurchases, signaling its growing capacity to return capital to shareholders.
Despite its growth investments in areas like cloud infrastructure and AI research, Alphabet has maintained exceptionally low debt levels compared to peers. The company has leveraged its strong cash generation to minimize borrowings, holding just $13 billion of bonds against cash reserves exceeding $100 billion.
“Alphabet’s conservative financial approach has yielded arguably the best financial profile in its class, and this is unlikely to change in the near future, even in the face of challenges such as top line growth and legal issues,” said Wilson.
Poised for Continued Growth
Alphabet is projected to generate revenues of approximately $255 billion in 2023 with EBITDA of $122 billion, underscoring the resilience of its business.
“Financial flexibility remains a cornerstone of its strategy, evident in its substantial negative net leverage and the stark contrast between its $13 billion in bonds and $106 billion in cash, alongside $78 billion in free cash flow,” explained Wilson.
The company’s AA+/Aa2 credit ratings reflect its commanding position in online advertising and search coupled with its rock-solid balance sheet. Despite substantially increasing shareholder returns and capital spending, Alphabet’s credit profile remains stable.
Potential for Buybacks and Dividends
While Alphabet’s management has yet to announce any changes to its dividend policy, there have been notable adjustments in the language used in its annual financial filings that could pave the way for future dividends.
“In contrast, the 2019 language explicitly stated that the company did not anticipate offering cash dividends in the foreseeable future,” noted Wilson. “In its most recent 10-K filing, Alphabet maintained the language indicating that it regularly assesses its capital structure, including capital returns.”
Furthermore, Alphabet’s board greenlit $70 billion in additional share repurchases in April 2022, with $52.3 billion remaining available as of September 30, 2022.
“After increasing its authorization for stock buybacks in conjunction with its first-quarter earnings, Alphabet still has over $50 billion available for buybacks,” said Wilson.
“This positions the company to enhance returns for shareholders, especially given the limited activity in mergers and acquisitions and the absence of dividend payments.”
Given the high regulatory barriers to large acquisitions, Alphabet is expected to remain disciplined in M&A spending despite its enormous cash pile. The company has deployed less than $10 billion on acquisitions over the past two years.
With share repurchases and potential dividends on the table, Alphabet appears well-positioned to continue rewarding shareholders through its capital return program.